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Hold Off On Writing Obituaries For Goldman Sachs, Morgan Stanley

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By ROY C. SMITH

Bloomberg News

Published: September 27, 2008

With their new capital infusions, Wall Street's last surviving stand-alone global investment banks are loading up for the future, even while reports circulate that their era has ended.
Goldman Sachs Group and Morgan Stanley are looking through the fog of the current financial mess - the superheated fumes that singed them both last week - and see a market rich with opportunities for firms with their special talents, connections and appetite for risk.

The new capital they have raised isn't just to pretty up their balance sheets, which already showed Basel Tier-1 risk- adjusted capital ratios of 12 as of the end of the third quarter. (That's well above the 8.5 average for a peer group of major universal banks.)

This capital can be deployed in promising investment situations that have been overlooked or shunned by their competitors.

They surely can see trading opportunities in the asset-backed securities market, where the liquidity seize-up has been severe for many months. With the new Treasury-managed intervention to establish floors in the prices of these securities, trading opportunities will abound. Prices can only go up.

Even if the plan isn't approved, there are still lucrative opportunities in asset-backed bonds, though these will require more diligent analysis, and no doubt a great deal of patience in realizing the expected returns.

Besides these opportunities, there are corporations, private-equity concerns and governments that have been starved for credit they need.
Goldman Sachs and Morgan Stanley will have money to lend at good terms to deserving projects around the world: corporate restructurings, a market that has virtually halted since July 2007; large energy projects; infrastructure finance; mezzanine debt; and providing short-term capital until the nervous commercial-paper market returns to normal.

While they are gearing up for these efforts, their principal competitors are reorganizing, integrating complex mergers, shoring up balance sheets after hundreds of billions in write-offs, and wondering what to say to their shareholders about the miserable performance of their stock prices over the past year.

Even while licking their wounds, the big banks will no doubt claim that their basic business model is sound. They will do this even after an eight-year period in which they have been caught up in bankruptcies (Enron, WorldCom and Parmalat), paid billions in fines and to defend lawsuits, faced scandals and shake-ups.

And this was all before the mortgage market crisis paralyzed UBS AG, Citigroup Inc. and Wachovia Corp. and sank the stock prices of most of the rest of the big banks.

The reports of the death of Wall Street after Goldman Sachs and Morgan Stanley became bank-holding companies were greatly exaggerated. They are back in business much as they were before all this happened. But they are bigger now, with more banklike resources.

The business model they are pursuing isn't to copy the big universal banks, but to become the most powerful and profitable wholesale banks in the industry, eschewing retail banking and deposit collecting, much in the manner of the original J.P. Morgan before 1933.

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